Research indicates that successful government contracting depends on sufficient internal management capacity. Numerous studies have examined the decision to contract out and its pitfalls, but few have tracked government contract management capacity. This study explores whether a change is observable in the capacity of U.S. local governments to engage in effective contracting from 1997 to 2007. The authors discuss whether this change represents a decline or degradation, and in which form and type of government it occurred. Using data from 537 local government units, the analysis reveals that some aspects of capacity have declined as local governments continue to contract out for highly complex services. The authors speculate on the reasons behind the findings and suggest capacity enhancement strategies.